Cypriot banks set to exceed 2023's record profits in 2024

Cypriot banks are maintaining a low profile, but it's expected that 2024 will bring in higher profits compared to the record-breaking figures of 2023. Last year marked unprecedented success in terms of profits, driven by the European Central Bank's decision to keep interest rates unchanged. This allowed Cypriot banks to maximize their deposits with the central bank, while loans tied to Euribor and ECB interest rates also contributed significantly to profits.

Forecasts suggest that 2024's profits for Cypriot banks could exceed 1.2 billion euros, a figure consistent with past trends. In 2023, bank revenues were primarily boosted by a significant rise in net interest income, fueled by increasing loan interest rates, in contrast with stagnant deposit rates. While some deposit returns are anticipated in 2024, the gap between deposits and loans is expected to persist, unlikely to diminish the substantial net profits projected to surpass those of 2023.

The rationale behind this lies in the ECB's interest rate hikes, particularly notable in 2023 with six increases compared to four in 2022. The deposit facility rate, the main refinancing operation rate, and the marginal lending facility rate currently stand at 4%, 4.5%, and 4.75% respectively, double the rates from 2023. The series of rate hikes began in February 2023 and persisted until September, setting the stage for substantial interest profits for banks, pending any rate cuts by the ECB.

However, this robust profit trajectory is anticipated to taper slightly following the ECB's decision to initiate interest rate cuts from June 2024 onwards. Despite potential reductions, the ECB aims for modest decreases, likely around 0.25% to 0.5%, possibly returning to rates seen in mid-2023. As hinted by ECB officials in April 2024, a gradual relaxation of monetary policy could commence if data aligns with the medium-term inflation outlook projected in March.

Banking executives in Cyprus acknowledge a shift in lending dynamics in 2024, prompting a strategic shift towards alternative revenue streams independent of lending. This realignment reflects the ECB's objective to curtail lending flows and encourage savings through interest rate adjustments.

March 2024 data from the Central Bank indicates a decline in new loans, particularly in consumer and housing sectors, underscoring the impact of interest rate adjustments on borrowing behaviors.

Interest rate fluctuations are also evident in consumer and corporate lending, influencing borrowing costs and potentially stimulating or dampening economic activity.

Furthermore, the disparity between deposit and loan interest rates persists, suggesting continued challenges for banks in maintaining profitability amidst changing market dynamics.

[This article was translated from its Greek original]